July 12, 2016
The “10 Most Gruesome Estate Planning Mistakes” series. Mistake #4: Owning Property Jointly
In general, the expert estate planning attorneys at The Elder Care Firm advise against owning property as joint tenants, unless the joint tenancy is held by a married couple. The reasons for same are explained below; however, even when property is held jointly by a married couple, there should be a plan in place for a beneficiary to receive the property upon the death of both spouses. If this plan is not in place the property would unfortunately end up in probate.
Different Types of Joint Tenancies
There are three basic ways to title a joint account, and each of them has distinct implications for estate planning, depending on your situation:
Joint tenancy with rights of survivorship: When one owner dies, property ownership transfers to the surviving owner(s) through the right of survivorship. Probate may be avoided by jointly owning an account or property with another person; nevertheless, probate is usually only postponed until the last death.
For example, if a Tom and Suzy only a property together as JTWROS, upon Tom’s death, the property would be transferred to Suzy free of probate. However, upon Suzy’s death, the property would then have to be probated because her name would be the only name left on the deed.
Also, a transfer by JTWROS is an outright distribution without any protection to the beneficiary (see Mistake #3 “Outright Distributions to Children”).
Tenancy by entirety: This is similar to joint tenancy with rights of survivorship, except that it applies only to married couples. One special benefit for married couples is that property held jointly by husband and wife is protected from the claims from one spouse’s creditors (except for IRS liens).
A common mistake that we see too often at The Elder Care Firm is when a married couple transfers a property held jointly in a tenancy by entirety into a Revocable Living Trust. This transfer lifts the creditor protection afforded to the couple. A better alternative would be to transfer the property by ladybird deed to the trust upon the death of both parties, thereby keeping the tenancy by entirety protections, and ultimately having the property distributed according to the trust’s instructions.
Tenants in Common: A tenancy in common is a form of property co-ownership in which two or more persons own the property with no right of survivorship between them. When one tenant in common dies, his or her interest passes to his or her heirs or devisees. In this type of shared ownership arrangement title does not automatically to the surviving tenant(s) in common.
A tenancy in common does not require equal shares. A different, unequal percentage of ownership interest may be established for each tenant in common under a tenancy in common.
An issue with TIC is that your property is subject to the estate plan of each tenant as well as probate for each tenant.
Adding a Child to the Property
Another common mistake with joint ownership that we at The Elder Care Firm see all too often is when a parent adds a child to their property or bank account for the purpose of avoiding probate. The intention of avoiding probate is good; however, this mechanism to do so is a mistake.
What the parent fails to realize in this situation is that when you add a child or any person onto a deed or onto a bank account, the child is now half owner of said property or bank account without any restrictions. In the worst case scenario, the child could clean the bank account out. Further, if the child were to file for bankruptcy, get a divorce, or get sued, the property would be considered an asset of the child’s. After all, the child is half-owner of the property or bank account.
A better way to accomplish the client’s goal of avoiding probate includes a ladybird deed to transfer the property. A ladybird deed (also known as an enhanced life estate deed) is a way to transfer property to someone else outside of probate while retaining a life estate in the property. But unlike a regular life estate, a ladybird deed gives you the power to retain control of the property during your life, including the right to use the property for profit or to sell the property. A ladybird deed is akin to adding a beneficiary designation to the property. The beneficiary’s interest in the property does not ripen until the death of the client.
Another option is a revocable living trust or an asset protection trust. The asset protection trust avoids probate and avoids Enhanced Estate Recovery.
To learn more, join us for one of our FREE LifeCare Planning Workshops. Our estate planning experts will have upcoming workshops in Ann Arbor, Bloomfield Hills, Brighton, Dearborn, Lansing, Livonia, Novi, and Trenton. We promise that time will fly, you’ll learn a lot, and have a little bit of fun. To sign up for a LifeCare Planning Workshop click here.